When Mario Draghi was appointed president of the European Central Bank, the German tabloid Bild gave him a Prussian helmet because it admired his Teutonic anti-inflation credentials. The Sun, Bild’s British equivalent, should give him keys to the City of London because of his pro-market credentials.
Mr. Draghi likes London. The Italian still has an apartment in the city, kept from his time as a Goldman Sachs banker. He is a man with a natural affinity for the markets.
Last week Mr. Draghi was in London, the scene of his July 2012 promise to “do whatever it takes to preserve the euro.” His message this time was that Europe needs a more European Britain as much as Britain needs a more British Europe.
He was careful not to wade directly into the British political swamp and say, for example, that Britain would be crazy to quit the European Union. He confined himself to listing the ways in which Britain’s economy, and the City in particular, are entwined with the euro zone. But it seems clear that he would prefer Britain to get stuck into Europe than stay on the sidelines — where it has been since Britain decided not to join the euro — let alone quit entirely.
Mr. Draghi didn’t say what he meant by a more British Europe. But it is interesting to speculate what the euro zone would be like if Britain had decided to join the single currency. For a start, the zone’s monetary policy would probably have been less German-dominated — and, hence, less obsessed with fighting inflation to the exclusion of other economic objectives.
The E.C.B. has, of course, still managed to innovate — in particular, with a bond-buying plan that has taken some of the sting out of the crisis. But it always has to watch its back, given criticism from Germany’s central bank and challenges in that country’s constitutional court.
A more British Europe might also now find it easier to adopt a sensible “macroprudential” policy for managing the flow of credit around the financial system. One of the zone’s little-noticed potential design flaws is a Germanic insistence on Chinese Walls between bank supervision and the conduct of monetary policy, even though both will come under the E.C.B.’s aegis.
While such separation makes sense insofar as the supervision of individual banks is concerned, it could be problematic for macroprudential supervision. Take the current situation. With inflation low, the E.C.B. should be pushing interest rates into negative territory or buying government bonds. The snag is that, while such a monetary policy would be right for the euro zone on average, it would be too loose for Germany.
The sensible approach would be to counterbalance such one-size-fits-all monetary policy with tight credit policy focused on Germany, implemented via extra-high bank capital requirements there. Maybe the E.C.B. will eventually get around to such a rational policy mix. But it would be easier if it could operate like the Bank of England, which doesn’t have Chinese Walls.
The zone’s banking system would also, arguably, be in a better shape if it was more British. This is not to deny Britain’s massive banking crisis. The point, rather, is that Britain has done a fairly good job of cleaning up the mess, while the zone has tended to sweep problems under the carpet — which has debilitated parts of the European economy.
The E.C.B. does have a chance to remedy this error. It has already insisted on a rigorous review of bank loan books and a stress test of their solvency before it takes responsibility for supervising them next year. It now needs to get governments to agree to wind down or recapitalize any banks that fail the test.
Another area where a more British Europe might have been beneficial would have been in shooting down the planned Financial Transactions Tax — which will gum up the markets, in the process disrupting the E.C.B.’s monetary policy. Maybe the tax will prove stillborn, anyway, given the lukewarm support from Germany. But this is not guaranteed.
The same goes for the management of the Cyprus crisis, where the somewhat anti-market European Commission insisted on imposing capital controls against the E.C.B.’s advice. Again, it may not be too late to mitigate the damage. The controls could, and should, be lifted when the resolution of the country’s two big banks is finished. But it would have been better not to have imposed them in the first place.
To some extent, such speculations are academic. Britain hasn’t joined the euro and won’t for a long time, if ever. But there are still two main ways in which a more engaged Britain could advance not only its economic interests in Europe, but Europe’s too.
First, the push by the British prime minister, David Cameron, for more competitive markets — principally by extending the single market to services and by signing free-trade agreements with the United States and Japan — could play a role in solving the euro crisis.
Second, Britain could campaign for an enhanced role for London’s capital markets in Europe. The European Union’s “bankcentricity” — under which finance is mostly routed through a semibroken banking system rather than the markets — will be a drag on growth.
Mr. Cameron and Mr. Draghi should make common cause on such an agenda. That’s a practical way to make Britain more European and Europe more British.
Hugo Dixon is editor at large of Reuters News.
Article source: http://www.nytimes.com/2013/05/27/business/global/27iht-dixon27.html?partner=rss&emc=rss
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